Sunday, December 6, 2015

Markets Mark Time

A good week for short term traders this week as the market broke down sharply on Thursday but then quickly recovered its losses on Friday.

It's unfortunate that the Central Bank manipulation is not even disguised anymore.  All eyes were focused this week on Mario Draghi, the head of the ECB, Europe's Central Bank.  Markets were expecting the ECB to add unprecedented stimulus to the market as Europe's economy continues to flounder.  Minutes before the announcement regarding ECB's intended actions, the Financial Times released a story saying that the ECB would hold rates steady instead of moving them even more negative than they are.  pre-market action saw the markets drop sharply.  When the actual announcement revealed that the FT story was not true, the markets rallied but then during Draghi's press conference, when it appeared that the stimulus would not be as powerful as first thought, markets cracked.  The biggest loser was the Euro Currency.

As can be seen in the chart above, the Euro currency soared against the dollar.  This was the opposite that Draghi wanted to happen.

On Friday, Draghi made further comments reiterating that they would do everything they could to stimulate their economy.  Markets reversed and went crazy on these comments. 

When asked by a reporter if he revised his comments to curb the markets' reactions, he responded, 'of course.'


My outlook remains unchanged from last week.  Last Friday, we failed to take out the previous weekly high close of 210.04.  That triggered a sell signal for me.  While it's possible that Thursday's sell off could be all that we get on the downside, I still think not.  In fact, the daily action from Tuesday through Friday only provide still yet another three period test sell signal.  Tuesday's closing price (SPY) was 210.68.  Friday closed well below at 209.62 although price did flirt with the 210 level.  I was trying to execute some trades at this point but there was not enough upward conviction at this level to push prices higher or for put sellers to meet my price. 

My week was fortunate as I entered with a range of SPY put positions.  The sharp drop however, resulted in my taking profits when SPY hit 207 and later when it hit 205.  At that point I noticed support at the 10 week moving average and bought some calls.  I was targeting the 208 level and sold the calls there and latter added some more December 31 puts in anticipation of a month-end test of the 191 level.

For the next week or so, I expect little to happen as market attentions turn to the next Central Bank activity which will be the Federal Reserve meeting December 16.  It is widely expected that the Fed will raise rates 1/4% for the first rate increase in ages.  The interest rate markets price in a high probability that the rate increase will occur.  Employment data, also released this past week, also 'appears' strong giving further credence to the rate increase.  

The stock market may think differently though.  We saw the severe reactions when Draghi's comments did not meet expectations.  If the Fed were to start tightening, I can't imagine the market continuing to rally.  In the past, the markets did rally for some time after until a trend in the tightening process emerged.  The bottom line though is that there are too many emerging market economies that would be decimated if rates were to rise and that would surely have a ripple effect throughout the whole world.  When the Fed was expected to raise rates last time, they held off citing foreign market turmoil as an excuse.

My guess is that any reduction of accommodation will signal that the party is over.  There will be a lot of pain ahead.  It's a given.  The only question is when will it occur?  How long can they keep the party going?  Will they try to continue until the next election so that the blame will fall on the new president?  That seems to be how it has worked in recent cycles. 

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